PEER COMPANIES

Some Indian conglomerates have outperformed the main equity indices this year. The market capitalisation of a dozen of the 20 top business houses in India have hit a six-year high as FY14 winds to a close. In addition, half the top 20 business houses outperformed benchmark indices. Groups such as Tata, Mahindra & Mahindra, United Breweries, Hero, the Anil Ambani-led Reliance Group, TVS and Adani were able to create wealth for investors at a faster pace than the S&P BSE Sensex and CNX Nifty during the year.

In the past few months, stock buying across the board has been driven by foreign and domestic institutional investors on hopes of an early economic recovery after the general election in April-May. The Sensex and Nifty gained 17-18% in FY14, compared with 7-8% in the previous fiscal.

Business houses with interests in information technology (IT), automobiles, telecom and media posted better returns. For instance, the total market cap of the publicly listed entities in the Tata Group, the nation's largest non-state conglomerate, rose 32% to 6.9 lakh crore. Robust performances by Tata Motors and Tata Consultancy Services, two of the group's key firms, drove overall gains. Other group companies including Indian Hotels and Tata Steel also gathered momentum in the last two months of the fiscal after being sluggish for the major part of the year.

HCL Group earned the highest return at 76%, driven by HCL Technologies. Faster sales and profit growth combined with higher profitability and strong cash flow persuaded investors to buy heavily into the nation's fourth largest IT exporter. "Two factors turned in favour of IT companies during the fiscal," said Phani Sekhar, fund manager, portfolio management services, Angel Broking.

"First, demand recovery in the US market, the largest for Indian IT exporters. The second factor was a sharp depreciation in the rupee against major currencies which further boosted rupee-denominated sales and profits."

TVS Group, with a 55% return, was the second best performer of the year followed by Adani Group, which gained 41.6% in market capitalisation. A near threefold jump in flagship TVS Motors helped the first whereas a double-digit gain in Adani Ports and Special Economic Zone helped the latter.

Among the business groups that touched a six-year high market cap were Tata, AV Birla, Mahindra & Mahindra, Hero, UB Group, Zee Telefilms and Shriram Transport.

Business groups with major interests in core sectors including capital goods, construction, infrastructure, and metals fared poorly during the year though the rally in these sectors towards the end of the fiscal helped reduce losses in market capitalisation.

Vedanta Group, which focuses on metals and mining, and Jaiprakash Group, which has cement and construction interests, reported an erosion in their individual market caps for the third consecutive fiscal. Mukesh Ambani-led Reliance Industries gained 17% during the fiscal, marginally underperforming the benchmark indices.

Some analysts believe business houses focusing on core activities will be able to regain momentum in FY15. "We do expect the recovery in the cyclical segments, such as industrials, energy and materials in FY15," said Rajesh Cheruvu, chief investment officer, RBS Private Banking, India.

"Earnings in these sectors have so far been compressed by weaker demand, which has impacted pricing power, while high finance costs have compressed return rations adversely."

Much will depend on the outcome of the general election.

"A stable government will be able to revive pending projects," said Sandeep Singal, co-head, institutional equities, Emkay Global Financial Services. "This will make industrial and banking stocks attractive since better cash flows will reduce non-performing assets."

However, an uncertain verdict would reduce the attractiveness of cyclicals, thereby making exportoriented stocks such as IT and pharmaceuticals more desirable. Such a scenario will limit the scope of improvement for business houses that are dependent upon the revival of the domestic economy.